Buying houses for land component not as smart as you think

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As detached houses become increasingly unaffordable, units are sometimes wiser investments, but there’s more to the story. Units can be better for reasons you’d have never dreamed

There was a time when investing in apartments was considered to be a far inferior choice to buying a home or duplex.

The value of real estate is in the land, the experts say, so you should plonk your investing dollars in houses where the land value appreciates for many years to come.

However, George Raptis, director of Metropole Sydney says that rule doesn’t always apply.

“Some people have this notion where they think that a house and land is a good concept as far as investment is concerned, because obviously the land appreciates, but the house doesn’t,” he says.

“But here’s the thing: if you go out into the suburbs and buy a house and land package, you might pay $400,000. Of that, $100,000 accounts for the land, and $300,000 is the cost of constructing the property. So the part of the asset that appreciates is only a small portion anyway.

“If you buy an apartment in a premium land-locked suburb, the land has a higher value. There might be a block of 10 apartments in Bronte, for instance, where the land beneath is worth millions of dollars. Your land-to-asset ratio is a lot higher, and that’s really what drives the price up.”

In other words, Raptis is saying that it might be better to own a small slice of a highly valuable piece or land, rather than a large slice of a low-value patch of dirt.

To add weight to his argument, Raptis confirms that units have recently outperformed houses as far is growth is concerned.

“That’s not traditionally the norm – usually, it’s normal for house values to outperform units,” he clarifies.

“But I think apartments will continue to make good investments, because it all comes back to supply and demand.”

Raptis points to Australia’s changing demographic as the main driver of growth in apartment living.

“Obviously, units are more affordable, and rising property prices mean that more people are looking for units as opposed to houses,” he says.

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  • Alisha Kennedy says on 22/11/2012 02:59:12 PM

    I would have to agree! We own a 1 bedroom investment unit on the second floor. Altho we do get impressive rent we are also having extreme difficulties in selling. Going onto 2 years of being on the market with a few interests that havent progressed into anything other than an inspection we intend to purchase a unit that has more than 1 bedroom, on the first floor, and a complex that has not got an inbuild elevator or numerous of pools as the body corporate fees are ridicously high and not to mention the extra repair costs. To add to all of that the complex is situated on a busy main road which turns most potential buys off it straight away even tho the noise is completely blocked off once you enter the complex. If only we knew these tips 6 years ago!

  • frank says on 22/11/2012 04:04:14 PM

    yep Alisha - beginner's mistake - buying on a main road because the same-size unit is cheaper - you think it's a deal until you come to sell - and then guess what - the main road has got busier/noisier/more unpleasant, and your capital gain is actually proportionately less than it would be had you bought in a more pleasant quiet street

    one-bedroom with lifts and pools - yep - another relative killer on costs

    I saw a current ad for a one-bedroom in the city - supposedly renting for $800pw - sales history $600k 3 years ago, $640k last year - wonder what they'll get for it on this resale - handover to the next gullible ...

    now that you've had that experience I may suggest avoiding new off-the-plan, and views unless they can never be built out, unlikely unless absolute waterfront - and go for north-facing living, south-facing sleeping, cross-ventilation with a minimum of east/west to avoid excessive summer sun

    talk to neighbours/residents about existing problems, check strata records (like $30 per hour in person), talk to lots of open inspection agents, have your finances ready, put in lots of low ball offers, and be ready to whack down a deposit and sign an unconditional contract as soon as you see the right property

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